At the end of 2021, the FCA will no longer compel banks to submit to LIBOR (the London Interbank Offered Rate) and there is a strong possibility of an imminent cessation. The preferred alternative among many market participants will be SONIA (Sterling Overnight Index Average), however, it may not be suitable for everyone. What role can the Refinitiv Term SONIA play in the GBP LIBOR transition?
- After the end of next year, the FCA (who regulate the LIBOR benchmark administrator) will no longer oblige banks to submit to LIBOR and there is a strong chance of a pending cessation. As a result of this, market participants must look for alternative rates.
- The favored alternative for many of the financial instruments and contracts that reference GBP LIBOR, will be the SONIA rate.
- The Refinitiv Term SONIA is a term risk-free rate based on industry best practice. It was developed and tested in H1 2020 at the height of the COVID-19 volatility, and is available through the full suite of distribution platforms.
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1. Not all market participants using GBP LIBOR are well equipped to migrate to SONIA
LIBOR underpins hundreds of trillions of dollars of financial instruments and contracts, making it one of the most widely used benchmarks in the world.
After the end of next year, the FCA (who regulates the LIBOR benchmark administrator) will no longer compel banks to submit to LIBOR, and there is a strong possibility of an imminent cessation.
In light of this, market participants must seek alternative rates. For many of the financial instruments and contracts that reference GBP LIBOR, the SONIA (Sterling Overnight Index Average) rate will be the preferred alternative.
However, the overnight risk-free nature of SONIA makes it poorly aligned with operational requirements in select markets and amongst certain participants.
Following a detailed study published in January 2020, the Working Group on Sterling Risk-Free Reference Rates identified that certain market participants and products require alternative rates. Smaller corporate, wealth and retail clients are likely to find adopting the technology to use compounded SONIA can be prohibitively expensive and unduly complex.
From a product perspective, loans, trade and working capital, export finance / emerging markets and Islamic facilities all have features that would benefit from a reference rate with a term structure.
2. The Refinitiv Term SONIA Reference Rate is a risk-free rate based on industry best practice
The Refinitiv Term SONIA leverages our extensive experience in administering benchmarks to create a GBP forward-looking term risk free rate published prior to noon on a daily basis. It’s available in one-month, three-month and six-month tenors.
The underlying input data is sourced from a variety of providers and processed under a waterfall methodology allowing Refinitiv to publish the rate in even the most challenging market conditions.
The primary source of data is executable quotes from electronic interdealer platforms for centrally cleared, spot starting GBP SONIA OIS contracts. We then calculate the mid-price based on clearing a predetermined notional amount.
If during periods of stress the electronic interdealer platforms don’t have sufficient liquidity, the rate switches to similar data from an electronic institutional (client-to-dealer) platform.
In the unlikely event there is a complete loss of liquidity in electronic trading of GBP SONIA OIS, we’re still able to publish a rate by adopting our integrated fallback. This applies the change in compounded SONIA in advance to the previous day’s rate.
Refinitiv continues to monitor the methodology and assesses it for the inclusion of further tenors and data sources to ensure alignment with the industry’s requirements.
3. The Refinitiv Term SONIA will be published even during periods of extreme volatility
The Refinitiv Term SONIA was developed and tested in H1 2020. During the period, we saw markets plunge in response to the COVID-19 crisis.
Our high-quality data inputs, robust methodology and extensive testing ensure we’re able to produce a representative rate even during periods of extreme market volatility, such as when the S&P 500 suffered the fifth-biggest one day fall on record due to COVID-19.
At no point during the crisis period analyzed would the Refinitiv Term SONIA be required to adopt the integrated fallback.
4. The Refinitiv Term SONIA is available in plenty of time to support the industry migration away from GBP LIBOR prior to any deadlines
Refinitiv is pleased to announce that we’ve already commenced publishing a prototype Term SONIA1.
This rate allows firms seeking an alternative to GBP LIBOR to evaluate its behavior and suitability, as well as to test technical integration.
Refinitiv currently plans to launch our regulated production version of the Term SONIA Reference Rate prior to year-end in order to meet the Working Group on Sterling Risk-Free Reference Rates recommendation that by the end of Q1 2021 all new issuance of GBP LIBOR-referencing loan products that expire after the end of 2021 should cease.
5. The Refinitiv Term SONIA is available through the full suite of distribution platforms
Refinitiv is working to make the Term SONIA Reference Rate easily accessible, and it is available through the full suite of distribution platforms.
For those looking to use the rate on their desktop, it’s available through Eikon. Simply enter the RIC GBPTRR1M=RFTB, GBPTRR3M=RFTB or GBPTRR6M=RFTB depending on whether you want to access to the one, three or six-month tenor.
Alternatively, search for ‘Term SONIA’ or visit the IBOR transition page in Eikon. For those looking to use Term SONIA via a feed, they can use the same RICs as available in Eikon but access the data via DataScope or Elektron.
1. 2020 © Refinitiv. All rights reserved. This is a prototype of the Term Sonia Reference Rate (“Prototype Reference Rate”) and is provided for informational purposes only. Refinitiv Limited, its affiliates (“Refinitiv”) and its third-party providers (together “Refinitiv and Third Parties”) do not guarantee the quality, accuracy and/or completeness of the Prototype Reference Rate or any data included therein. Refinitiv and Third Parties make no express or implied warranties, representations or guarantees concerning the accuracy, completeness of the Protype Reference Rate or as to the results to be obtained by you, or any other person or entity from the use of the Prototype Reference Rate or any data included therein. In no event shall Refinitiv and Third Parties have any liability for any loss of profits, special, punitive indirect, incidental or consequential relating to any use of the Prototype Reference Rate.
No information provided, displayed or contained in the Prototype Reference Rate is intended to be, or should be construed or used as, a benchmark, whether as a reference rate in financial instruments, or financial contract; or for valuation and pricing activities (“Prohibited Use”). Whether you have entered into a contract with Refinitiv or not, you are not permitted to access or use in any way such information for the Prohibited Use and may breach the Benchmark Regulation and/or any contract with Refinitiv if you do. Refinitiv does not warrant that the Prototype Reference Rate is provided in accordance with the Benchmark Regulation. “Benchmark Regulation” means, in respect of the EEA, EU Regulation 2016/1011 and in respect of another country, the equivalent legislation. If you are in any doubt about the meaning of Prohibited Use or your obligations under the Benchmark Regulation, you should seek professional advice.
The “SONIA” mark is used under licence from the Bank of England (the benchmark administrator of SONIA), and the use of such mark does not imply or express any approval or endorsement by the Bank of England. “Bank of England” and “SONIA” are registered trademarks of the Bank of England.